Depreciation is an expense recorded to allocate a tangible asset's cost over its useful life. Categorised as a noncash expense, accounting rules require an offsetting account to balance the books. Accumulated depreciation is the contra account used to offset the imbalance created by a noncash expense. It also can be used to determine the depreciated value of an asset.
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Straight line depreciation reduces the value of an asset in equal parts over its useful life. The formula is: Purchase Price divided by Useful Life. There are accelerated methods of depreciation, however, that do not change the calculation for depreciated value.
For this example, let's assume you own a printing shop, and need to purchase a large font printer for £16,250. You can depreciate the value of the machine over a useful life of five years, and it will have no salvage value at the end of this period. That is, the value of the asset will be completely written off.
In our example, the annual depreciation is the purchase price ($25,000) divided by useful life (5 years), or £3,250. Every year, £3,250 will be written off to determine a new depreciated value of this asset.
To calculate Year 1 depreciated value, subtract £3,250 from the depreciable base of £16,250. In our example, this would equal £13,000. The new depreciated value of this asset is £13,000.
Calculate Year 2 depreciated value by subtracting £3,250 from the depreciated value of £13,000. The new depreciated value of the asset is £9,750.
Subtract £3,250 from the depreciated value £9,750 to calculate Year 3 depreciated value for the answer: £6,500.
Calculate Year 4 depreciated value by subtract £3,250 from the Year 3 depreciated value of £6,500 for an answer of £3,250.
To find the final, Year 5, depreciated value, subtract £3,250 from the depreciated value of £3,250 to arrive at the final answer of 0.
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